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China-Pakistan Economic Corridor – Is Pakistan Going to be an Economic Power or Another Chinese Province?

China-Pakistan Economic Corridor

 

CPEC or China-Pakistan Economic Corridor is a gigantic long term project to build energy, highway, and port infrastructure to deepen economic connections between China and Pakistan.

CPEC is long running project with massive business proposition, spreading over a span of 15 years involving huge investments from China, an estimated total outlay of $46 billion out of which $35 billion on the energy sector and $11 billion for infrastructure development projects in Pakistan, like industrial zones, rails, roads and highways etc.

Chinese banks will provide most of the loans to fund the multi billion dollar project, details of these loans have not been made public in Pakistan, which generates a lot of doubts in the masses of Pakistan, may be the government seems to be feared from the response of already loan-riddled nation.

China-Pakistan Economic Corridor

A 3,218Km long route from Chinese province Kashgar to Gwadar is a hallmark of this epic project. Chinese goods will have an easier access to the Middle east, Africa and beyond with this new shorter and efficient route. Currently these goods have to travel a long distance of around 10,000 Km from the South China Sea to reach Gulf. 

Let’s analyse some of the aspects of this mega project.

Balance Of Power

China is already considered as an emerging superpower, its thriving economy has given a tough challenge to all the major exporters of the world, with trillions of dollars in reserves it has a strong financial base and a high purchasing power parity, also the rate of economic growth has been exceptional.

From arms to airplanes, Chinese companies are manufacturing everything, all those consumption based economies are the biggest importers of Chinese goods, making China a power player in Asia, with One-Belt-One-Road and CPEC initiatives, China will have stronger footprints in the regions which might disturb the regional balance of power.

Also read : Pakistan’s Economic review since 1947 to date.

It is extremely difficult to accept the underlying Chinese claim that the China-Pakistan Economic Corridor, under the Belt-Road Initiative is an economic project with no geopolitical connotations.

With increased and fast access to Middle East, Africa and Eurasia, China will have an economic advantage on all the other economies, Pakistan which is already facing economic crisis might succumb to the influence of China.

China-Pakistan Economic Corridor

Financial Aspect

Loans – Entire CPEC project is based on loans from Chinese banks and other stakeholders, the initial loan amount was $46 billion which has now become $56 billion(citation needed), the loan has been taken on Sovereign Guarantee.

As mentioned earlier, $35 billion will be invested in Infrastructure project, and this amount will be paid back by Pakistan as equity (ROE) which is guaranteed at either 17% or 20%.

Pakistan as of 2017 has a debt of almost $72 billion, a rough estimate says it’s 70% of total GDP, right now the present government is mortgaging the public assets like Motorways, Airports etc. to acquire more loans from IMF, how will an already debt ridden economy bear the load of interest on loans, is a question whose answer is known to nobody.

This is also a very serious implication that all the financial information about the loans and funding have been kept secret from the public, which further raise ambiguities about the financial future of Pakistan

Some sources suggests that the rate of interest on CPEC loans is 7% p.a, which is payable in next 25 to 30 years, keeping in view the total amount of CPEC the monthly installment(interest only) will be $7 to $8 billion, with current economic condition, will Pakistan ever be able to pay back the interest + principal amount?

China-Pakistan Economic Corridor

Industrial Aspect

Favoring Chinese Contractors – The rule of thumb says that whenever a country acquires a product, or initiate a new project from a foreign contractor or company, it’s of prime importance to safeguard the interest of local entities and industries, for the said purpose such arrangements are made like TOT(Transfer of Technology), transfer of knowledge, recruit and train local manpower, increase local production, and award of contracts to local contractors as much as possible.

But this seems not the case with CPEC, most of the contracts are one sided, very few or no contracts bid are made against Chinese companies. Consequently, this will damage the industrial base of Pakistan which already is not in good shape.

Local vs Chinese Workforce – There is no check and balance about recruiting the manpower, as the contracts are made in favor of Chinese companies, those companies are bringing their own workforce to Pakistan, for china it’s very beneficial as they will have a trained workforce which speaks their own language.

It’s the responsibility of Pakistani government to make sure that workforce from the region should be employed or at least a ratio should be agreed upon about how much workforce will be brought from outside. If Pakistani government doesn’t take any stringent actions now we will have a great influence of Chinese labor on our domestic labor force.

China-Pakistan Economic Corridor

Toll & Tax Relaxation for Chinese – Severe lack of foresightedness and lack of financial wisdom is apparent here, logistically China will be paying no tolls and taxes for usage of highways and roads, this is certainly going to create a big problem in future and raise questions about how Pakistan will service the huge debt in coming years.

Taxes and tolls will be a main source of income, subsidizing can be an option instead of exemption, Pakistan will lose billions with such bargains and apart from that Pakistan has to pay further cost to maintain and secure the infrastructure for long lasting and continued use.

Pakistan plans to train 15,000 security personnel to protect Chinese workers on the corridor. Presently, 8,000 Pakistani security officials are deployed for the protection of over 8,100 Chinese workers in Pakistan, all these expenses Govt. of Pakistan has to bear from its own pocket.

Collapse of Pakistan’s Industrial Base – Pakistan is on the verge of witnessing and experiencing a Wal-Mart-effect soon, with cheap Chinese goods and services entering the Pakistani market, damaging whole local industrial base, with no power, no stability and high production cost, it’s completely out of question that Pakistan will be able to compete with Chinese goods and services once they show up in the region.

China on the other hand has proven past record of entering in other markets and damaging them to an end, wiping out the local indigenous industry, and Pakistan has already opened up the floodgates for this.

Also Pakistan has much less to offer China for trade, on the flip side Pakistani markets are flooded by Cheap Chinese goods which may actually kill their traditional businesses.

China-Pakistan Economic Corridor
Inside a Haier Pakistan factory.- Source : https://thewire.in

Environmental Aspect

Environmental Destruction – Most of the power plant projects are targeting the immense coal reserves of Pakistan, the aim is to exploit the reserves to generate power at a relatively cheap cost, while totally ignoring the environment and health aspects.

The emission of carbon dioxide and other greenhouse gases will not only have adverse effects on human health but it will also destroy the regional ecological system. China on the other hand is trying to close their own power projects due to the excessive emission of toxic gases in the air.

Though the Hydroelectricity is cheaper but it need lot of time to build. To solve Power Generation problem as fast as possible, Pakistan don’t have any choice to accept Coal based plants which later will create severe environmental problems.

Cultural Aspect

While many think that the China-Pakistan Economic Corridor pact will bring economic prosperity to Pakistan, not many are considering the cultural implication. With a steady increase in Chinese manpower in Pakistan, there is to be a cultural clash between the two very diverse nations.

Who will affect whom or will they remain independent? We may expect Chinese women not following the dressing and modest values of Islam, which may become unacceptable for a relatively stringent fundamentalist religiously intolerant Pakistani society.

The world’s history is full of the instances where the clash and so called merger of cultures and civilizations didn’t give birth to a new culture, rather it eradicated the existence and uniqueness of society’s original heritage and culture, we may expect that soon Pakistan will have an identity crisis, as we have seen the same in Europe and United Kingdom.

Pakistanis may soon succumb to Chinese culture. And will this have a colonial sort of effect on the locals? Will British hegemony of the 19th and 20th centuries be replaced with Chinese in the 21st? Will the Chinese eventually leave the country or they will stay forever. Only time will tell.

China-Pakistan Economic Corridor
Women buy jewellery from a Chinese vendor in Rawalpindi’s Raja Bazaar. – Source : https://thewire.in

Pakistan’s Current Situation

Failed Engine of Income Generation -Unfortunately at this juncture Pakistan does not produce anything of real value, our once excellent agriculture and textile sector has already gone down the drain, subsequently Pakistan has lost its competitiveness in global trade market.

Imports far exceeding than Exports are giving rise to trade deficit, every year Pakistan needs foreign aids and loans to compensate the deficit, according to rough estimates Pakistan has 215% trade deficit which indicates that we are importing more than double of what we export.

Lack of Foreign Exchange Reserves – Pakistan’s current FX reserves are more speculative than real, recent hike in reserves were a result of borrowing huge loans from foreign commercial banks and IMF, a further tweaking was done by issuing bonds in local and international market, those bonds suddenly showed some extravagant numbers, but this is an illusion as ultimately Pakistan has to pay back the loans, service the debt, and give coupon on issued bonds.

Pakistan’s Total foreign exchange reserves are $22 billion that include $4.8 billion of the commercial banks as well. And out of these $4.8 billion, the government has borrowed $3.3 billion from the commercial banks, called as “forward buying from the market” to be returned to them.

Also read : Reasons of poverty in Pakistan

Impotent Taxation System – Pakistan has one of the world’s worst taxation system, only a fraction of eligible population pays tax, a mere of 1% is registered in Tax system, Government collects only 9% of country’s total wealth in taxes, resulting in a very poor tax to GDP ratio.

Traditional and age-long rivalry with the neighbor country force budget makers to spend a reasonable amount of country’s wealth on military, Pakistan is currently spending nearly $10 billion on defense, which includes Pakistan in the list of top 30 high military expenditure countries.

This all sums-up to an issue of empty state wallet, how will the state purse repay the loans, feed its nation, and keep the economy moving.

China-Pakistan Economic Corridor
Made In China.

Non Performing Social System – Economic and social indicators of  human development and social welfare are very poor in Pakistan, inadequate to non existent public health care is unable to give any relief to the poor, more than half of the population is below the poverty line where the yardstick to measure the poverty is an income of $1 per day, the results will be more devastating if you increase this amount to $4 per day.

According to World bank report Pakistan spends a mere 0.9% of its GDP on health, the infant mortality rate is 66 per 1000 births, life expectancy in Pakistan is 66 years which is very less compared to other developing countries.

Not only health but Pakistan’s education system is near to collapse, with Pakistan spending only 2.68% of its GDP on education, giving rise to feudal mentality in the region. The literacy rate overall is nearly 58% which is far from real, and everyone knows the reasons.

There is no harmony between the labor market and educational system, universities are producing graduates on a massive scale, the quality of education is questionable too, but the labor market outside is very hostile, unemployment rate in recent year has skyrocketed to 8.5%, giving rise to other social crimes.

The point is that with such education and health system, an individual of the society is unable to contribute to the system, how will a nation will make use of such gigantic scale CPEC project when it will be in full flow, the demand for skilled and talented workforce will have to be fulfilled, with no local support from the regional workforce, Chinese companies will do every effort to bring their own labor from China.

Also read : Pakistan lost way to economic growth

Final Thoughts

CPEC represents China’s strategic interests in East Asia and the way United States has challenged them. Faced with such difficulties, China hopes it can expand its strategic space by heading west.

Pakistan serves as a crucial bridge between China and Central Asia, South Asia, and the Middle East. Security and stability in Pakistan will make it possible for China to exercise greater influence in these regions and to ensure security at home. This is why China is willing to pour vast amounts of resources into the economic corridor—based on the logic of improving security through economic development.

Likewise, Pakistan has realized that no other country places such high strategic importance in its economic relationship with Pakistan as China does. Pakistan also greatly values the economic corridor and views it as mutually beneficial in terms of politics and economic development.

Thus CPEC, if pursued to its logical conclusion, with pre-requisites of effective law and order, national focus and consensus, timely implementation, transparency and accountability, benefits accruing to smaller provinces – may well turn into a ‘cultural corridor.’

The question remains, is CPEC a game changer? The idea of Pakistan re-socializing towards China will ultimately be more beneficial for Pakistan. On the contrary if not handled properly the project’s success will add very little to the plummeted economy of Pakistan rather it will have devastating effects on socio-economic and political system.

 

Would appreciate your feedback on this.